Tax Shelter

Tax Shelters are ways to protect income, or earnings, from federal or state taxes.  For example, a plan that allows employees to avoid or defer paying taxes, and promotes saving for retirement, is a tax shelter.  One of the more common tax shelters that individuals can take advantage of is a Roth IRA.

While an IRA allows the individual to avoid paying future taxes on interest earned, it also serves an economic purpose:  retirement income.  Roth IRAs, Traditional IRAs, SIMPLE IRAs, 401(k) plans, and 403(b) plans are all examples of tax shelters. Corporate tax shelters include tax deferral or reduction tax laws, such as accelerated depreciation, and are used to encourage new investments.

The term "tax shelter" can also carry a negative undertone, due to abuses that often take place.  For example, transactions that have no economic purpose, other than reducing income taxes paid, are considered abusive tax shelters and are to be avoided.